Compass Minerals International, Inc. (CMP) on Q2 2021 Results - Earnings Call Transcript
Operator: Good morning, and welcome to the Compass Minerals’ Second Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session, instructions will be provided during that time. Please be advised that today’s conference is being recorded. I would now like to turn the call over to Douglas Kris, Senior Director of Investor Relations. Please go ahead. Douglas Kris: Good morning, and welcome to the Compass Minerals’ second quarter 2021 earnings conference call. Today, we will discuss our recent results and our outlook for the balance of 2021. We will begin with prepared remarks from our President and CEO, Kevin Crutchfield; and our CFO, Jamie Standen. Joining in for the Q&A session are Brad Griffith, our Chief Commercial Officer; as well as George Schuller, our Chief Operations Officer. Before we get started, I will remind everyone that the remarks we make today represent our view of our financial and operational outlook as of today's date, August 16, 2021. These expectations involve risks and uncertainties that could cause the company's actual results to differ materially. A discussion of these risks can be found in our SEC filings located online at investors.compassminerals.com. Our remarks today also include certain non-GAAP financial measures. You can find reconciliations of these items in our earnings release or in our presentation, both of which are also available online. The results in our earnings release, issued Friday, August 13, and presented during this call reflect only the continuing operations of the business, unless otherwise noted. The results also restate historic amounts for comparative purposes, and reflect adjustments to information presented in the company's previously filed Annual Report on Form 10-K for the year ended December 31, 2020, and quarterly report on Form 10-Q for the quarter ended March 31, 2021. As previously announced, the nine month 2021 fiscal year reflects the change in fiscal year end from December 31 to September 30. I will now turn the call over to Kevin Crutchfield, our President and CEO. Kevin Crutchfield: Good morning, and thanks for taking the time to participate today. While I'll kick off my comments with a brief overview of our financial performance for the second quarter, I also want to take a few minutes to review where we stand as a company in light of our leadership teams previously communicated strategic priorities. As reported, we maintained solid momentum in the second quarter, controlling what we could control in pricing and salt sales volumes. Ultimately, that work resulted in strong consolidated revenue growth of 14% compared to the prior year period, because meaningful contributions from both salt and plant nutrition enabled us to exceed our top-line revenue expectations for the quarter. We continue to work through our previously reported sulfate of potash feedstock inconsistencies, and managing around supply chain disruption and inflated shipping costs, which are not unique to our industry. While both our consolidated operating earnings and adjusted EBITDA saw second quarter declines compared to the prior year, largely due to margin compression during the quarter, year-to-date, we've seen measured growth in these categories of 20% and 13%, respectively. I'm pleased with the way our team continues to navigate this challenging environment, staying laser-focused on execution in our core businesses. In fact, during the first-half of 2021, we generated strong positive free cash flow of $220 million, an increase of approximately 23% versus the prior year. On the cost management side, we've taken prudent steps to control our selling, general and administrative expenses compared to the prior year. We also continued to actively manage our capital plan, and spending in that category coming in at approximately $34 million year-to-date. Focusing on our salt segment for a moment, second quarter revenues were better than expectations at over $142 million, while operating earnings of approximately $19 million, and EBITDA of $37 million were both down, primarily driven by a 28% increase in shipping and handling costs for the segment. Our reported salt segment results for the quarter were also impacted by an accounting methodology change that Jamie will discuss in more detail. When considering our salt results on a year-to-date basis, however, we've achieved meaningful growth of 23% in operating earnings, and 20% in EBITDA for the segment. Regarding the 2021-2022 bid season for our North American highway business, we continue to take a disciplined approach, balancing market share with margin capture, while always looking for opportunities to strategically expand our footprint. With our bid season approximately 80% complete, we expect the average contract pricing for this winter season to be generally consistent with prior season results, while our total committed bid volumes are expected to increase by approximately 7%. Leading to our plant nutrition segment, an increase in average selling price of 6%, and relatively flat volumes in the second quarter compared to prior year, translated to $54 million of revenue for the segment, which was slightly better than expectations. Operating earnings for the segment were $5.6 million lower compared to second quarter 2020, while EBITDA came in at $9.8 million, roughly in line with expectations given our previously discussed feedstock inconsistencies that are anticipated to weigh on segment costs, at least in the third quarter of this year. We continue to believe the impact of the feedstock quality issues on the cost structure of our plant nutrition business is short-term in nature, and the proactive adjustments that we've implemented to address the issue have shown favorable incremental results. We're also actively monitoring the ongoing drought conditions in the Western U.S., and continually assessing how they may potentially impact near-term demand for our Protassium+ SOP product. SOP sales volumes remained stable through the quarter, and we expect volumes to remain steady through September, compared to the prior year quarter. However, we'll continue to keep a close eye on demand as the drought season continues, as there could be volume impact later in the 2021 calendar year. As I alluded to at the beginning of my comments today, I'd like to now shift gears from the quarterly recap to provide some color on our strategic execution as a company. When I joined Compass Minerals’ in mid-2019, one of my first task as Chief Executive Officer was to set a course for countless minerals that acknowledged, that didn't dwell on the challenges of the past, that recognized long-term success must be built on a foundation of consistent execution, and then provided clarity to both our employees and our external stakeholders, as to what kind of company we were committed to becoming. With the help of my senior management team, I outlined early 2023 priority focus areas for our company: building a sustainable culture, delivering on our commitments, and conducting a deep strategic assessment of our advantaged assets and related capabilities. It's been approximately 18-months since we've laid out those priorities. And while there still is certainly work to be done, I'm extremely pleased with how far we've come in that short time span. Over the course of the last six months in particular, we have successfully executed against a number of strategic priorities that provided the company with a platform to generate material long-term benefits to our shareholders. Paramount to building a sustainable culture is ensuring the safety and well-being of our workforce. We focus on a zero harm and parity for our people and our environment, by continuing to strengthen safety and environmental stewardship processes across all sites, with the ultimate goal of zero injuries or incidents in the workplace. We continue to enhance employee safety training, which focuses on elimination of at risk behaviors. And we maintain a culture of open communication and trust, by empowering every employee to stop any work process they deem to be unsafe. I'm proud to say the results of our safety focus was reflected in the first quarter of this year by multiyear low for our total case incident rate, or TCIR 12-month rolling average. That strong safety performance continued through the second quarter with a rolling 12-month TCIR of 1.4 A, representing a significant improvement over the previous five year period. As you've heard me say before, we believe our safety performance is a leading indicator for operational success, and one of our fundamental commitments to creating a sustainable business. The other half of building a sustainable culture requires increasing our levels of employee engagement and our execution muscle, which has been a key focus of our internal optimization efforts that we launched in the fall of 2019. Making improvements in this area doesn't come easily or quickly, and it requires a certain level of humility as an organization to gain self-awareness about what we do well, where we can get better, and what steps are required to get there. While I'm generally pleased with the strides we've made in this category, including but not limited to our commitment as a board and senior management team to ensuring diversity and inclusion throughout all levels of the organization, this will continue to be an ongoing area of focus for our company. Through our increased execution muscle, we've enabled improvements in our second strategic imperative, delivering on our commitments. The foundation of this priority is simple. Be clear with our stakeholders about our goals, capabilities and challenges, and then do what we say we're going to do. We've talked a lot on these quarterly calls about the other half our internal optimization efforts, creating value for the organization through a bottom up process of innovation and continuous improvement. For purpose, so we're not calling these efforts a program, as they permeate through all levels of the organization that are increasingly becoming simply how we do business here at Compass Minerals. As it has clearly been a strategic focus for our team, I’d offer recent performance at our Goderich mine is probably the most salient example of our efforts today. Over the course of the last few years, we've made meaningful improvements in both production and safety, hitting internal records in both categories. We've implemented a new long-term mine plan to increase production efficiencies and extend the longevity of the strategic core asset. As reflected in the historic five year collective bargaining agreement secured in late March, we buttress those efforts by committing time, energy and resources towards rebuilding strong and lasting relationships, with both our representative workforce at Goderich, and the community they call home. But despite this progress, I still believe we have room to grow at Goderich, or we can say it has fully reached its operating potential. Which brings me to the final area of strategic focus, I've often spoken about, positioning our company for success by getting our core asset mix right, finding new ways to leverage those advantaged assets, and strengthening our balance sheet in the process. In this area, our actions have been well documented. With a completed sale of our North American micronutrients business in April, followed July 1, with the completed divestment of our South American plant nutrition business, we achieved the financial flexibility needed to consider strategic growth opportunities, whether organic or otherwise. Specifically, these transactions have enabled us to reduce our long-term debt by approximately $400 million. In addition, we continue to pursue a sale of our South American Chemical business, and look forward to sharing more information around that expected transaction when appropriate. And finally, as we announced several weeks ago, we're excited by the opportunity to broaden our central mineral portfolio through the identification of a sustainable lithium resource at our Ogden, Utah solar evaporation site on the Great Salt Lake. We're currently undertaking a strategic evaluation to assess development options for this lithium brine resource, in order to serve as growing domestic market demand, while maximizing the long-term value of the asset. As a co-product of our existing SOP salt and magnesium chloride production processes, the addition of lithium to our Ogden production portfolio is not expected to have an impact on the essential minerals we already produce on-site. Equally as important, by leveraging existing operational infrastructure, permits and pond processes at our Ogden facility, we believe we're uniquely positioned to capture this newly defined lithium resource, with nominal incremental impact to the beds and waters of the Great Salt Lake. We feel this organic opportunity is well aligned with our strategic imperatives, and we're excited to share more details soon on this and other future projects that lie ahead. But opportunities like this are only feasible if the underlying fundamentals of our operating segments are sale. I remain highly confident about the inherent strengths of our advantaged assets, the resiliency and commitment of our people, and the discipline with which we operate. As we continue to advance our strategy and grow our essential minerals business, we do so with a deep commitment towards generating sustainable earnings growth and even on margins, thereby creating value for all stakeholders. Now, at this time I'll turn it over to Jamie, who will discuss in more detail our second quarter financial performance and the rest of the year outlook. Jamie? Jamie Standen: Thanks, Kevin, and good morning, everyone. I'll start with a few comments regarding our consolidated results before moving on to our segment specific performance, and then finishing with our rest of year outlook. On a consolidated basis for second quarter 2021, the company achieved strong year-over-year sales volume growth in our salt segment, and increased pricing in our plant nutrition segment compared to prior year results. Despite this top-line revenue uplift, our consolidated operating income was below the prior year period by approximately $9 million, while our consolidated adjusted EBITDA fell 21% compared to 2020. Over the same period, we saw both operating margins and EBITDA margins compress. This compression is primarily related to unit costs associated with the feedstock inconsistencies for our SOP production that we've highlighted over the last two quarters, as well as elevated shipping and handling costs in the salt segment. We are pleased to report that during the first six months of the year, we generated about $255 million in cash flow from continuing operations, and approximately $222 million of free cash flow. As announced in June, our Board of Directors approved the change in our fiscal year-end to September 30 from December 31. We're optimistic this change will improve our full year forecasting accuracy going forward, as we will have the benefit of embedding complete highway deicing bid season results within our full year forecast at the beginning of each fiscal year. From an accounting perspective, the shorter nine month year in 2021 impacts our results in a couple of different ways. First, it temporarily increased our expected effective tax rates of 40%, and therefore, increased our year-to-date tax expense to $17.7 million. However, this is not expected to impact our effective tax rate for cash taxes over the typical 12-month period. Similarly, changing to a shorter year temporarily increases our unit costs in both the plant nutrition and salt business during the second and third quarters, by about $20 per ton and $0.50 per ton, respectively. Looking now at our salt segment results, total sales in the second quarter of 2021 were $143 million, up from $122 million in the second quarter of 2020, an increase of approximately 17% and ahead of expectations. This improvement was largely due to additional demand related to customers taking minimum volumes, as well as the timing of certain chemical sales. In addition, our consumer and industrial sales volumes returned to more typical levels, as demand normalized compared to last year, which was negatively impacted by the early months of the pandemic. As expected, highway deicing prices at $59.42 per ton were slightly lower versus the prior year quarter. I think it is important to note that while we have seen lower highway deicing prices over the last four quarters, highway deicing prices have actually shown a 4% average annual growth rate since 2017. On the other hand, consumer and industrial average selling prices increased over $8 or 5% to $158.78 per ton, due to broad-based inflation-related price increases across all of our product groups. Operating earnings for the salt segment totaled $19.2 million for the second quarter versus $22.5 million in the 2020 quarter, while EBITDA for the salt segment totaled $36.8 million compared to $39.7 million in the prior year quarter. On a year-to-date basis, these segment results are at the high-end of our second quarter guidance expectations. Our operating and EBITDA margins contracted approximately 5 and 7 percentage points respectively, compared to the 2020 second quarter, which is mostly due to a 28% increase in shipping and handling unit costs, impacting both our highway deicing in consumer and industrial businesses. Again, when comparing on a year-to-date basis, salt operating margins are flat year-over-year, EBITDA margins contracted only 1 percentage point, and shipping and handling unit costs are flat as well. That being said, we did expect these higher shipping and handling costs this quarter, which fall into three primary buckets. First, vessel and barge costs were higher year-over-year, largely due to higher fuel costs as well as modest rate increases. Another bucket is related to our depot costs. In this area, we added some long-term capacity and saw higher overall rents. Last piece was related to distribution costs in our C&I business. While mix played a role in the increases, we saw significantly higher truck rates, as well as some illogical shipping required to overcome supply chain disruptions during the quarter. Overall, we believe the entire salt industry has been similarly impacted by shipping and handling costs. Therefore, we expect to adjust our future bid prices and product repricing as appropriate to offset these costs, just like we have in the past. Second quarter salt per unit cash costs were relatively flat from second quarter 2020, as improved UK production costs were offset by higher production costs in the consumer and industrial business. Turning to our plant nutrition segment, second quarter 2021 revenue was 5% higher than the prior year quarter at $53.8 million. This reflects steady sales volumes and an increase of 6% in our average selling price compared to the prior year quarter. It's worth noting that during the second quarter, there has clearly been strong global demand for all fertilizer products. We've generally continued to see strong demand in North America for our Protassium+ SOP product. And though, that was partially offset by the severe drought conditions in the west and southwest, we are pleased to deliver 6% sequential improvement in our average sales price compared to the first quarter of 2021. Plant nutrition operating earnings were down $5.6 million and EBITDA was down $6.1 million to $9.8 million for the second quarter compared to the second quarter 2020. With higher prices and lower earnings, we experienced some short-term compression in our operating margins from 12% down to 1%, while our EBITDA margins also compressed by 13 percentage points to 18% versus second quarter 2020. As we have previously discussed, we continue to experience higher per unit operating costs during the second quarter, as we work through the feedstock inconsistencies impacting our SOP production rates. While this continues to impact our financial results, these elevated short-term costs are factored into our guidance, and we have implemented proactive measures to address the situation. We also made a change to our interim period inventory valuation methodology. As we work through our normal quarterly closing process, we identified the need to correct our interpretation of the accounting guidance, as it relates to our salt segment interim period inventory valuation reporting. It is important to note that this correction impacts interim periods only, and does not impact our historical full year results. When compared to our new method, our historical interpretation overstated first quarter product costs, and understated subsequent quarter product costs with no impact to the full year results. For 2021, this resulted in shifting approximately $12 million in costs from first quarter 2021 to subsequent periods. About $11 million of those costs were recorded in the second quarter this year. Our second quarter 2021 Form 10-Q described this change and restated our year-to-date 2021 financial information, as well as our prior year-to-date information. Because we are making corrections to these prior periods, we've also restated our financials for other immaterial items, including shifting a few of these items into the appropriate periods. It's very important to note that the change in methodology, as well as the other corrections are now reflected in all periods presented in our second quarter 2021 financial statements. Now I'll spend a few minutes on our reporting, as well as our third quarter and nine months 2021 outlook. Given the change in our fiscal year ended September 30, the company will file a transition report on Form 10-K for the shortened 2021 fiscal year sometime in November. After this shortened period, full year reporting will consist of four full quarters beginning October 1 and year-end of September 30, each year. At this time, we are providing nine month 2021 guidance on a pro forma continuing operations basis, which excludes results from our discontinued operations. As we head into our final quarter of fiscal year 2021, we continue to be optimistic about the overall business. We anticipate the salt segment will provide steady revenue and EBITDA generation for the remainder of our new fiscal year. We expect third quarter salt segment revenue of $160 million to $190 million, and EBITDA of $45 million to $55 million, with our consumer and industrial business continuing to deliver steady sales volumes. In our plant nutrition segment, we currently anticipate relatively flat year-over-year sales volumes during the third quarter. However, the continued drought in the Western U.S. could put some pressure on our sales volumes in the back-half of the calendar year. So we continue to closely monitor the situation out west. Given this demand backdrop, coupled with our expectation of rising shipping and handling expenses, as well as unit costs slightly higher than those realized in the second quarter, we are expecting plant nutrition revenue of $28 million to $36 million, and EBITDA in the range of $5 million to $8 million for the third quarter of 2021. While we continue to optimize our portfolio through efforts to balance price, demand, and customer relationships, we are focused on operating this business sustainably for the long run and plan to carefully navigate these dynamics. On a consolidated basis, for the nine month 2021 period, we expect our adjusted EBITDA to be between $175 million and $185 million. Now a few corporate items, our interest expense estimate for the nine months step year is approximately $46 million, as we significantly lowered our debt levels in July. Our nine month capital spending forecast is approximately $70 million, and our free cash flows expected to be in the $70 million to $75 million range. With the closing of the plant nutrition South America agro business sale, along with the completed North American micronutrients sale, we have been able to meaningfully reduce our absolute debt levels and continue to expect our leverage ratio to be in the 2.75 to 3 times net debt to EBITDA range upon completion of our Brazil chemical business divestiture. As we consider our short and long-term paths forward, we are pleased with the continued efficiency we've been able to capture from our internal optimization plan. And we're excited for the future as our strategic assessment of our newly defined lithium resource progresses. As Kevin noted in his comments, our entire senior management team is unified in our focus on executing against the strategic imperatives we have laid out for the company. As we continue to optimize our existing assets and build our essential minerals portfolio, we will continue to aim to optimally allocate capital in a way that maximizes shareholder value. With that, I’ll ask the operator to begin the Q&A session. Operator? Operator: Your first question comes from the line of David Begleiter with Deutsche Bank. David Begleiter: Thank you. Good morning. Kevin, just on the bid season pricing lack any pricing, is that due to you couldn't get pricing or you didn't try get pricing in order to maximize some of your volume gains? Kevin Crutchfield: I'm not sure I caught all of that question, David. Would you mind repeating that? I apologize. David Begleiter: Yeah. On the lack of any pricing and if highway deicing is that a function of you couldn't get the pricing because of given competitive dynamics in marketplace, orCMP Ratings Summary
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Compass Minerals International, Inc. (CMP) Earnings Preview: Key Insights and Financial Outlook
Compass Minerals International, Inc. (NYSE: CMP) Quarterly Earnings Preview
- Wall Street anticipates an EPS of $0.23 and revenue forecasts of approximately $393.95 million for CMP's upcoming quarterly earnings.
- Legal challenges are impacting investor confidence in CMP's financial disclosures.
- CMP's valuation metrics show a mixed picture, with a high debt-to-equity ratio but a positive current ratio indicating short-term financial health.
On Tuesday, May 7, 2024, Compass Minerals International, Inc. (NYSE: CMP) is set to announce its quarterly earnings after the market closes, with Wall Street anticipating an earnings-per-share (EPS) of $0.23 and revenue forecasts around $393.95 million. This financial event is closely watched by investors, especially in light of the company's current legal challenges. CMP is embroiled in a class action securities lawsuit that accuses the company of securities fraud, specifically related to allegedly overstating the likelihood of securing a renewed U.S. Forest Service contract for its magnesium chloride-based product. This lawsuit covers the period between November 29, 2023, and March 22, 2024, a timeframe that is crucial for investors monitoring the upcoming earnings report.
The lawsuit has prompted legal firms, including Levi & Korsinsky, LLP, and The Schall Law Firm, to seek recovery for shareholders who suffered losses during the specified period. These legal actions underscore the heightened scrutiny on CMP's financial and operational disclosures, potentially impacting investor confidence as the earnings release date approaches. The allegations of making false statements and concealing information have cast a shadow over the company's financial health and operational integrity, factors that are vital for evaluating CMP's earnings outlook.
Financially, CMP's valuation metrics provide a mixed picture. With a price-to-earnings ratio (P/E) of approximately 34.59, the company is seen as having a higher valuation compared to earnings, which could be a point of concern for value-focused investors. However, the price-to-sales ratio (P/S) of about 0.45 and an enterprise value-to-sales ratio (EV/S) of roughly 1.08 suggest a more favorable view of the company's sales value. These metrics, along with an earnings yield of around 2.89%, offer insights into the company's financial performance and market expectations ahead of the earnings announcement.
Moreover, CMP's debt-to-equity ratio (D/E) of about 1.56 and a current ratio of approximately 2.15 highlight aspects of the company's financial leverage and liquidity. The debt-to-equity ratio indicates a significant use of debt in financing the company's assets, which could be a concern if earnings do not meet expectations or if legal challenges impact financial stability. Conversely, the current ratio suggests that CMP is capable of covering its short-term liabilities with its short-term assets, a positive sign for immediate financial health.
As Compass Minerals International, Inc. prepares to release its quarterly earnings, investors and analysts will be keenly watching how these financial metrics, coupled with the ongoing legal challenges, will influence the company's performance and future outlook. The earnings report will not only reflect CMP's financial health over the past quarter but also offer clues on how the company is navigating its current legal and operational hurdles.
